Chapter I Introduction

CHAPTER I INTRODUCTION

1.1 Research Overview The object of this research is the LQ-45 Index on the Indonesia Stock Exchange (IDX) because it is the most liquid index. According to Hartono LQ45 Index formed for most actively traded 45 stocks in IHSG. The sample period is divided into three periods which are before the phenomenon of Trade War (three days before July 6, 2018), at the moment (July 6, 2018) and after the phenomenon of Trade War (after July 6, 2018). The sample of this research consists of 26 companies that is consistent listed in LQ-45 for two periods (February 2018-July 2018; August 2018- January 2019) and didn’t do any dividend announcement.

Table 1.1 Research Object No Company No Company No Company 1 ADHI – Adhi Karya Tbk. 10 BSDE – Bumi Serpong 19 PTPP – PP (Persero) Tbk. Damai Tbk 2 ADRO – Adro Energy 11 EXCL – XL Axiata Tbk. 20 SMGR – Semen Tbk. Indonesia Tbk. 3 ANTM – Aneka Tambang 12 HMSP – H.M. Sampoerna 21 SSMS – Sawit Tbk. Tbk. Sumbermas Sarana Tbk. 4 ASII – Astra International 13 ICBP – Indofood CBP 22 TLKM – Telekomunikasi Tbk. Sukses Makmur Tbk Indonesia Tbk. 5 BBCA – Bank Central 14 INCO – Vale Indonesia 23 TPIA – Chandra Asri Asia Tbk. Tbk. Petrochemical Tbk. 6 BBNI – Bank Negara 15 INDY – Indika Energy Tbk. 24 UNVR – Unilever Indonesia Indonesia Tbk. 7 BBRI - Bank Rakyat 16 JSMR – Jasa Marga Tbk. 25 WIKA – Wijaya Karya Indonesia Tbk. 8 BJBR – BPD Jabar Banten 17 LPPF – Matahari 26 WSBP – Waskita Beton Tbk. Departement Store Tbk. Precast Tbk. 9 BMRI – Bank Mandiri 18 PGAS – Perusahaan Gas Negara Tbk.

Source: Secondary Data Processed from LQ-45 Constituents for two periods of February 2018 - July 2018 and August 2018 - January 2019.

1.2. Research Background The capital market as one of the economic instruments is inseparable from the influence of the economic and non-economic environment. According to Altin (2015) the influence of the economic environment consists of the influence of the macro and micro economic environment, while the influence of non-economic environments such as war, political chaos, president election, ministerial cabinet announcements, and other events also influence stock price fluctuations. As the biggest economy in the world, the United States and China leads the economy world, as shown in Table 1.2

Table 1.2 World’s Biggest Economies Based on Data from IMF 2018

Source: Data Processed from www.weforum.org (2018)

The powerful countries that listed in the Table 1.2 has a big role to control the world economy. Every regulation that implemented by these countries, especially the US and China, will influence many countries around the world, including Indonesia. According to M. Ayhan Kose, Csilla Lakatos, Franziska Ohnsorge and Marc Stocker writing for Vox EU, the growth of surge in the world’s largest

economy could influence global activity in a positive way, it could boost global activity. Unfortunately, the US policies could give a negative effect. According to an article on simplicable.com, the economic change is the restructure of economic system. There is example of economic change that relate with this research which is trade. The trade war as one of trade shift can results a sudden reduction in trade. The impact of trade war phenomenon on the Indonesian economy is the deceleration of economic growth challenge. According to the Chief Economist of Bank Mandiri, Andry Asmoro, published on an article of kata.co.id, there is challenge of 70 Indonesia’s export destination are slowing down, this will certainly be affecting commodity prices and the trade balance. Andry said that the U.S. and China are categorized as the big four of Indonesia’s export destination. If their contributions are combined, the Indonesia’s export reached approximately 25% of Indonesia’s total exports. Andry also said that “If the Chinese economy goes down 1%, the impact on Indonesia is around 0.09% to 0.1%. Meanwhile, if the US economy falls 1%, the impact on us is around 0.07-0.08%, "

Figure 1.1 Trade War Impact Negatively on Indonesia Exports Source: data processed by INDEF published on https://databoks.katadata.co.id/

As seen in the figure above the 2019 Institute for Development of Economic and Finance (INDEF) Mid-Year study said that the ongoing trade war between the two economic giants, the United States (US) and China, had an impact on the export performance of several countries. Indonesia is one of the countries affected by the negative trade war on exports, which is estimated to be minus 0.24% until the end of 2019. Besides Indonesia, exports of European countries are predicted to be minus 0.32, Japan minus 0.92%, Oceania will drop 0 , 62%, India fell 0.08%, and Africa fell 0.01%. On the other hand, the trade war did not really affect several countries,

such as Vietnam which is predicted to record a positive export growth of 2.58%. In addition, other countries that recorded positive impacts of the trade war in terms of exports were Malaysia which rose by 0.39%, Singapore by 0.53%, and Thailand by 0.23%. The relation of economic growth to Indonesia Stock Exchange (IDX) is the deceleration of economic growth will impact the slowing down of company revenue growth. According to Bahana Sekuritas, Lucky Ariesandi on kontan.co.id said that one of the sentiments that most affected the growth index was the company’s revenue received on the IDX. Unfortunately, the company’s revenue growth has slowed down due to deceleration of economic growth. The U.S and China trade war is one of the phenomena that impact the world economically. According to a U.S Economy expert and president of WorldMoneyWatch.com, Kimberly Amadeo writing on her article for thebalance.com, the implementation of tariffs is meant to protect the local industry, because it gives leverage for local manufacturers to have a lower price in contrast with the imported ones. However, tariffs implementation tends to trigger a trade war. In a long term, trade war resulting in depreciation even inflation for all countries involved. The trade war phenomenon also has an impact to the Asian stock market. According to an article written on kontan.co.id, the trajectory of the trade war between the United States (US) and China was beaten on July 6, 2018. This makes some indices in Asia become depressed in trading today. Asian market ever influenced by the trade war, Dean Napolitano, writing for Nikkei Asian Review, said that when there was a meeting in Argentina that attended by two president of the countries who are the perpetrator of trade war, declared a cease-fire. When this happen, Shanghai Composite Index increased for 2.6%, Shenzhen Composite Index increased for 3.3% and Hang Seng Hong Kong index increased for 2.6%. Trade war begins when the U.S began imposing tariffs on $34 billion in China goods, it triggers the trade war between those two most economic powerful countries. CNBC Indonesia, as one of the business channel television in Indonesia,

writing on its article, tells that IHSG decreasing 1.79% for a week that affected by trade war sentiment as shown in the figure 1.1.

Figure 1.2 LQ-45 condition on same week that trade war begins Source: https://www.cnbcindonesia.com On July 6, Trump officially imposed an additional import duty of 25% for 818 Chinese products. China also retaliated by charging 25% for 659 US products. This mutual revenge action made the global economic situation even more uncertain. As a result, investors' concerns increased and caused the stock exchanges in the Asean region including Indonesia to fall. On the other hand, the threat of trade war began to approach Indonesia. Sofjan Wanandi, Chair of the Vice President Expert Team, who revealed Trump would revoke a number of special treatments currently being given to Indonesia. This threat seems to be a signal that must be responded to carefully. If Trump really imposes import tariffs on Indonesian products, then it will have a negative impact on the Indonesian stock market. The existence of a trade war has the potential to encourage the flow of hot money to Indonesia to recede. then it is not impossible that the IHSG will remain in the red zone in the future. Not enough from external, internal factors also become one of the causes of the Jakarta Composite Index to fall. Bank Indonesia (BI) projections that the current account

deficit in quarter II-2018 will widen. It is estimated that the current account deficit in that period amounted to 2.5% of Gross Domestic Product (GDP). If this prediction is correct, then the deficit is greater than the quarter I-2018 which is only 2.15% of GDP. IHSG was again hit by sentiment from the release of foreign exchange reserves data as of June 2018. BI released Indonesia's foreign exchange reserves figures as of the end of June 2018 of US $ 119.8 billion. This figure dropped US $ 3.1 billion from the position at the end of May 2018. This decline was due to the central bank's efforts to stabilize domestic exchange rates. On the other hand, reduced foreign exchange reserves cannot be separated from Indonesia's poor trade performance. Data from the Central Statistics Agency as of May 2018, Indonesia experienced a trade deficit of around US $ 1.5 billion. This deficit also added to investor concerns. Because, just a week ago the flow of hot money that came out reached Rp 1.32 trillion. With the condition of external and internal factors being so strong, the flow of foreign capital is not comfortable in Indonesia. As a result, the IHSG fell this week. From the LQ-45 Index that become object of this research, there is a reaction too for the trade war phenomenon. According to an article written on Kontan.co.id, domestic stock market fluctuations also dragged blue chips stock prices. In fact, the weight of correction of large capitalized shares is much sharper than the second and third tier stocks. This is reflected in the movement of the LQ45 index. Since the beginning of the year until the closing of the market on June 8(ytd), the index that contains the most liquid shares on the Indonesia Stock Exchange (IDX) has fallen 11.92%. Binaartha Sekuritas analyst Muhammad Nafan Aji said that the decline in LQ45 index members was due to investors' profit taking. In addition, there is the effect of a trade war between the United States and China as well as an increase in the Fed's interest rates.

Figure 1.3 LQ-45 Index first period (February 2018-July 2018) Source: https://finance.yahoo.com/

Figure 1.4 LQ-45 Index second period (August 2018-January 2019) Source: https://finance.yahoo.com

Figure 1.5 LQ-45 Index when Trade War phenomenon officially begin Source: https://finance.yahoo.com As shown in Figure 1.2 the first period of LQ-45 index (February 2018 – July 2018) at the beginning has reach it peaks but in sudden it’s decreasing significantly and also in Figure 1.3 shows the second period of LQ-45 index (August 2018 – January 2019) increasing too. The conclusion is, at the first and second periods tell us about the fluctuation that happen around those periods, which trade war itself happen in that period. As shown in figure 1.4 on 6th of July 2018, there is a decline on that day for the LQ-45. The LQ-45 index is the most liquid index in the IDX. It consists of 45 companies that are always updated every six months, in which the first period is on February- July and the second period is on August-January. Some selection criteria for determining an issuer can be included in the calculation of the LQ 45 index are: (1) First criterion is: a. In the top of 95% from total annual average transaction value of shares in stock market. b. It is in the TOP 90% of the average annual market capitalization. (2) The second criterion is: a. Is the highest order representing the sector in the JSE industry classification in accordance with its market capitalization? b. Is the highest order based on the frequency of transactions (Tjiptono, 2001, p.95-96).

The methods that used in this research to analyze efficient market hypothesis is the event study. Event studies is a method used to examine the half-strong market hypothesis, that has an intention to observe how announcement leverage the market securities (Tandelilin, 2001, p. 115-116). Usually, event studies hook with how swift is announcement reflected stock price. Hartono (2010) states that an efficient market condition is if the market reacts quickly to achieve a new equilibrium price that fully reflects available information. There are three forms of EMH (Bodie, Kane, Marcus, 2014: 353), namely: (1) Efficient in weak form (weak form) the market is classified as a weak form if the stock price fully reflects all information based on price, sales volume, or past (historical) profits. (2) Efficient in half strong form, the market is classified as a semi-strong form if all available public information is reflected in market prices. This information can be in the form of past prices, company fundamental data, profit predictions, and accounting practices. If investors get the public information, it will be reflected at market prices. (3) Efficient in strong form (strong form) The market is classified as a strong form if the price fully reflects all information, both historical data, public information and private information. There are several methods to calculate abnormal return: Mean Adjusted Model, Market Model, and Market Adjusted Model. There are similar researches that have been done in the past that used event study as their research methods. Need to be understand that this research didn’t have similar object that used same phenomenon (trade war) and also not many researchers used similar phenomenon (trade war), but there are few researchers used trade war as their phenomenon and used similar variable that become this previous research. Many researches that giving different results regarding the impact of a phenomenon to abnormal return, or average abnormal return, or cumulative average abnormal return. Oehler, A., Walker, T. and Wendt, S. (2013) explain the impact of American president election on eight industries in the 1980- 2008 U.S. presidential elections influence stock market performance and to examine factors that affect firms’ stock returns around these elections. The cumulative average abnormal return variable used to measure how much the effect

of the event to the stock market. They find that the cumulative average abnormal return of eight industries in the U.S. is depends on which party that win. The victory of a Democratic candidate rather negatively influences overall stock returns, while the results are rather mixed for Republicans victories. A change in presidency from either a Democratic to a Republican candidate or vice versa causes stronger stock market effects than re-election or the election of a president from the same party. They also find that the firms’ marginal tax rate is positively correlated with abnormal stock price returns around the election day. Another research that used in this research for previous literature is Vargas, L. (2016) explain the result of abnormal return as its variable research of CSR and financial performance to Generali Insurance Company (GIC) in Italy with 29 days as its event period. Vargas, L. (2016) explained that the research used event study that is supported by the notion of market model and efficiency market, a semi-strong form of an efficient market. The method used in Vargas is same with this research which is a semi- strong form (event study). The result shows that there is a tendency toward share value increasing and decreasing, but these changes are not significant in the light of public information related to CSR. Another research by Ahmed et al., (2018) using event study as its method and CAAR as its variable shows that the event study reports significant negative abnormal return around the announcement date of sukuk issuance. The study also reveals that the earning prospect of issuer firms affect the investor reaction. Firms with lower earning prospect receive negative reaction from investors. Another research that has same phenomena is Huang et al. (2018) with event study as its method and CAAR as one of its variable result heterogeneous market response to announcement of trade war against china. The market response to this event for firms in both countries depending on their direct and indirect exposures to U.S.-China trade. U.S. firms that are more dependent on exports and imports from China have lower stock and bond returns but higher default risks in the short time window around the announcement date. So far, they have examined firms’ stock return reactions to the trade war’s announcement using a sample of US publicly listed firms. Since trade is a two-way game, we should expect that U.S.

tariff hikes (and their announcement) should also affect the export sales of Chinese firms in the U.S. and thus their stock market performance. Another results shows on Klevak et al., (2018) that abnormal return of U.S. company, using five days as its event period, the research result found that tone of the conference calls of companies that mention trade tariffs talks affects the variance but not the mean of stock return. The reaction is both managers and analysts of firms’ seem to treat trade war as bad news: calls with tariff discussions tend to have more negative tone and more pessimistic earnings forecast revisions. Discussions of trade war impact on the companies are also reflected in more volatile stock returns after the call. It might be too early to tell what effects tariffs discussions will have on long-term market returns. Liu et al., (2018) research on Japanese companies in 11-days window with variable AAR and its method is event study and the phenomenon is disruption announcement found that the abnormal return is significant in the two days before disruption announcement. Another research by M’ng et al., (2019) research on 105 public listed companies from Malaysia, Singapore, and Thailand with variables AAR and CAAR with its method is event study and the phenomenon is announcement of corporate bond issuance for Malaysia, Singapore and Thailand. The result reveal that there is a significant effect of bond issuance announcement of issuance on share price returns. The results also disclose that the market is not efficient at its semi-strong form as proposed by the market efficiency market hypothesis. And Xiaohui et al., (2019) research on China’s stock market on phenomenon of “hunting the tigers” as the political China anti-corruption. At the event, the results show that the “Hunting the Tigers” has incurred a significant short-term loss of investment returns for shareholders in China’s main stock market board. From the previous researches that have been done, we can conclude that even we used same methods which is event study the result may vary because of different object or event period or variables. The market reaction will give abnormal return to investors in the capital market. The study of the event its impact on capital markets are often referred to as event studies. Research using event study is usually

divided into three groups; (1) pre-event range, (2) at the moment, and (3) post-event range According to data on Figure 1.2 and 1.3, there is a significant fluctuation of the LQ-45 index stock prices obtained in two periods of 2018 and early 2019. It is interesting to analyse how is the market reaction of LQ-45 in the period of when trade war happened during the period of 2018 and early 2019. Furthermore, the phenomenon of trade war between the U.S and China could influence the most liquid index in Indonesia. Therefore in this research, the author attempts to examine this new rarely phenomenon by using event studies with the title of: “MARKET REACTION TO THE LQ-45 INDEX ON THE INDONESIA STOCK EXCHANGE (IDX) TO THE TRADE WAR PHENOMENON BETWEEN UNITED STATES AND CHINA PERIOD OF FEBRUARY 2018 TO JANUARY 2019”.

1.3 Problem Formulation There is a fluctuation that happened to the LQ-45 on the IDX which the fluctuation happened in the period of before trade war phenomenon happened, at the moment trade war phenomenon happened and after trade war phenomenon happened. This research intended to analyze that the economic and politics phenomenon between countries that may influence another country measured by abnormal returns.

1.4 Research Questions 1) How is the condition of abnormal return before, at the moment and after Trade War phenomenon begin February 2018 – January 2019 ? 2) Is there any significance difference of average abnormal return between before, at the moment and after Trade War begin February 2018 – January 2019? 3) Is there any significance difference of cumulative average abnormal return between before, at the moment and after Trade War begin February 2018 – January 2019?

1.5 Research Objectives 1) To know the market reaction of the LQ-45 to the trade war phenomenon 2) To know the average abnormal return of the LQ-45 during the before and after trade war phenomenon 3) To know that the performances of most liquid stock in Indonesia before, after and during the trade war

1.6 Research Benefits 1.6.1 Theoretical Aspects Student and Researches, could use this research as one of the references of market reaction to the trade war phenomenon by using event studies.

1.6.2 Practical Aspects To know the impact of the trade war phenomenon to the LQ-45 index on the Indonesia Stock Exchange (IDX).

1.7 Research Scope 1.7.1 Research Location and Objects The sample of this research consists of 3 companies that is consistent listed in LQ-45 for two periods (February 2018-July 2018; August 2018-January 2019).

1.7.2 Research Period The period of this research from January 14, 2019 – December 30, 2019

1.8 Systematically Writing CHAPTER 1: Introduction Chapter 1 is about description of the research, which includes research overview, research background, research formulation, research questions, research objectives, research benefits, research scope, and systematically writing.

CHAPTER 2: Theoretical Review and Research Scope This chapter summarizes all valid theories, published researches regarding the topic or the problem, a set of reasoning used to describe the research problems that finally form theoretical framework, research hypothesis.

CHAPTER 3: Research Method This chapter underlines the approach, method, and technique used to gather and analyse the data to answer or to explain the research problem. It presents type of research, operational variable, research stages, population and sample, data collection, type of data, technique of data analysis and hypothesis testing.

CHAPTER 4: Research Results and Discussions The statistical testing and data interpretation are included in this chapter. Moreover, the resulting problem identification will be further examined

CHAPTER 5: Conclusion and Suggestion The result of research findings is concluded in this chapter. Additionally, suggestions are given for the next study related to this research.